KNS Financial

Personal Finance From a Biblical Perspective

A Few Tips To Better Understanding Loans

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[The following is a guest post explaining the various terms used concerning loans, so that you can make a more informed decision when borrowing money.]

Deciding that you need to apply for a loan of any sort can come at a traumatic and hard time for anyone. And yet once you have decided to take that step you are confronted with a wall of buzz words and catch phrases that simply don’t mean anything to you.

Follow this plain speaking guide below to understand for certain what type of loan you might require.

Loan Sign

Unsecured Vs Secured 

Loans fall into two categories here and are always one or the other. A secured loan is one that is secured against something that you already own. For example you might take out a loan that is secured on your car. This means that if you default on payments the loan company may seek to claim ownership of your vehicle instead to make up for the missed payments.

An unsecured loan is one that is not tied to any assets, these tend to be short term and for smaller amounts than secured loans.

Short Term Vs Long Term 

Again loans are always one of these two categories, either short or long term. This are relatively self explanatory expressions with short term loans being repaid over a much shorter time frame and long term loans being held over a longer time. Short term loans tend to be for smaller amounts such as an overstretched month or small purchase.

Long term loans tend to be larger and for one of purchases of a substantial nature, the most common of course being a mortgage which is a long term loan to buy a house.

Guarantor Loans

Traditionally those people with bad credit or low wages have not been able to take out loans. However, it is now possible for these (and others) to get a guarantor loan which is a loan that another person guarantees will get paid.

In essence this means that if you default on the loan then they become liable for the repayment.

Open Ended Vs Close Ended

A closed end loan is simply one that as you pay back the debt decreases but it gives you no available credit for re-borrowing. An open ended loan is one that as you pay back money you gain credit which allows you to re-borrow again and again up to the total you originally borrowed.

This means that your debt can go both up and down.

So now you’ve got the basics, hopefully you feel a bit more confident about finding out your next step.

photo credit: freedigitalphotos.net

3 Reasons Looking At Monthly Payments Is A Mistake in Car Buying

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When most people think about owning a car, they usually think of it as a necessity, and not a luxury. I have seen many people rush into the decision to buy a car, thinking that they can’t live without one. Unfortunately, this can lead to plenty of car buying mistakes.

In my opinion, focusing on monthly payments is probably the biggest car buying mistake that one can make! Actually, whenever you are making a purchase based solely (or mainly) on the monthly payments, you are making a huge mistake.

How Monthly Payment Targets Can Lead To Car Buying Mistakes

Unfortunately, many people in this country have become accustomed to “buying” items without actually having the cash to pay for it. This has lead to an entire industry of furniture/mattress salesmen, real estate agents, electronics vendors, and even car dealers who try to sell you their product based on estimated monthly payment.

There are a number of problems with this (including funding your indulgences by borrowing), but I’ll only focus on a couple here:

3 Reasons Looking At Monthly Payments Is A Mistake in Car Buying

Price Is Rarely Discussed

When you are only trying to target a particular monthly payment amount, the price is rarely discussed. Most of the time, the salesman will simply ask you how much you are willing/able to pay each month.

I’ve had a number of car salesmen who virtually refused to discuss the total price, until I let them know how much I could “afford” per month. Of course, when I told them that I wanted to pay cash, they had to back off (or watch me leave)!

If you are buying a product, and you do not focus on negotiating how much you pay this item, then it will be easy for a salesperson to take advantage of you!

Monthly Payments Are Easy To Manipulate

The reason why the dealer is so eager to talk about monthly payments is because they can lower them without losing any money! Here are a few examples…

The salesman can arrange for you to pay a lower amount each month, simply by extending the length of your loan!

If you take out a $20,000 car loan at 8% annual interest for 36 months, your monthly payment will be about $627. Extend your loan period to 48 months, and your monthly payment drops to $488. Your salesman can bring it down to $406 if they set you up to pay for 5 years! If all you can afford is $350, simply agree to pay off this loan for a full 6 years, and you can afford your dream car (actually, you’d still be about $0.66 short)!

The same thing will happen if the dealer is able to workout a lower interest rate with their bank or financing arm. Using the above example, if your rate drops from 8% down to 5%, then your monthly payment will be about $599!

What you will notice in both of these examples is that your purchase price never changed! All the salesman did was manipulate a few of the variables in your loan, and he was able to fit into your budget!

This is why focusing on your monthly payment is one of the biggest car buying mistakes that you can make… The dealer can easily overcharge you for a car, and you’ll walk away ignorant and happy, because you like your payments!

You May End Up Paying For Unwanted Add-Ons

Anyone that has purchased a car from a dealer knows that there are other fees that can get tacked on to the purchase price. If you are only concerned with the salesman’s ability to get you a low monthly payment, then you may just gloss over these other fees, and pay for something that is unnecessary.

Also, many dealers will try to get you to take on extra packages and services, which you don’t need. Again, if you are only focusing on your monthly payment, you won’t see those things. For instance, if you agree to buy a car for $20,000, and you are asked to pay $24,000, then you can ask for an itemized list of taxes, fees, and other expenses, which make up that additional $4,000! But if you agree to “buy” a car for $450/month, you won’t even notice that they are there.

I remember a dealer adding a few thousand dollars to the purchase price of my current car. It was for services and/or packages that I declined, but he left it in the system. I was only able to tell because I was working with all of the numbers in my spreadsheet (not just a monthly payment)! It could have been an honest mistake, but either way, it would have cost me thousands of dollars for something that I didn’t want or need.

Be sure to look at the whole picture when pricing a car!

photo credit: freedigitalphotos.net

Reader Questions

  1. What are some of the ways that focusing on a monthly payment has lead to financial trouble for you?
  2. Have you ever noticed how car salesmen are so reluctant to talk about the overall price? How do you handle that?
  3. Has negotiating based on monthly payments ever worked out in your favor?

Why We Chose To Make A Loan To A Friend

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Whenever I counsel anyone who talks about making a loan to or taking a loan from a friend or family member, I usually tell them that it’s a bad idea. It can very easily ruin your relationship with that person, even if they do pay you back.

 

Making loans to friends or family can definitely cause a lot of stress; and there may even be some tension that unintentionally gets built into the relationship. This is especially true if the borrower has trouble making some of the payments or if they don’t seem to take their obligation seriously, because of the closeness of your relationship.

Lend Money to Friend Family

Another thing that can happen is that the lender begins to scrutinize every purchase that the borrower makes. For instance, if you had to borrow some money from your brother, and then (while the loan is still outstanding) you ask him to help you set up your new flat-screen tv or expensive computer, he might begin to wonder why you didn’t use that money to pay him back completely!

I’ve seen this happen even when the borrower is making all of the payments on time! The high-end electronics example may be a little extreme, but it can happen with buying an article of clothing or even just eating out. The point is, it’s hard to know that these feelings will creep up until you are actually in this situation.

This, plus a number of other reasons, is why I try to avoid lending money to a friend or family member, even it proves to be the best loan available for them.

Because of what he was dealing with, and also his financial trouble in the past, there was no way that he could qualify for a great personal loan from a bank.  I recently wrote on my other website about our friend getting into some financial trouble because the deferred payments were due on his car loan. I also told you how he was able to get out of the mess.

{Find out what the bible says about cosigning for a loan!}

He called me up and asked if he could borrow money from me, and that he should be able to pay it all back within a couple of weeks. I called my wife and told her the situation and we agreed to give him the loan. Here are the main reasons why we decided to go against my normal recommendation:

Why We Chose To Make A Loan To A Friend

He had a plan to pay us back – He looked over his income and expenses for the next few weeks, and determined that he would be able to repay us within a month. I was impressed that he didn’t just make a unrealistic promise out of desperation.

He has recently made financial sacrifices – He is selling a car that he loves and he also moved to another state in order to pay cheaper rent.

He is trying to get his finances in order – I met with his girlfriend earlier this year in order to help her get her finances (and she has taken care of a lot of things so far), and he has asked me to sit down with him as well.

He realizes that his situation is his own fault – The remorse that he is showing over his situation is not just based on not wanting to deal with adversity, but it comes from an understanding that his poor financial decisions are to blame. This is what is fueling his desire to make serious changes and become financial responsible!

It was a real need – He needed the money in order to pay his rent (our loan covered a portion…he had the rest). To me, that’s important enough to at least consider going against my general advice.

We had the money in our emergency fund – Since we have an emergency fund, we were able to give him the loan without reaching into our checking account, or wrecking our budget for the month.

It won’t destroy us financially if he is unable to pay us back – Proverbs 19:17 tells us…”One who is gracious to a poor man lends to the Lord, and He will repay him for his good deed.” Even if he isn’t able to pay us back, we will not hold it against him (we would just need to communicate). We really wanted to bless him in this situation, and ultimately, our repayment will come from the Lord!

We knew that it was the best loan for him – He may have been able to get a payday loan or find some other way of getting the money, but we didn’t want him to be forced to do something that would have made his situation worse.

As you can see, even though I would normally counsel against extending a loan to a friend or family member, there are some cases where we will do so. However, a lot of things have to line up in order for that to happen. It took a lot of consideration and evaluation, but in the end, I think we made the right choice.

photo credit: Freedigitalphotos.net

Reader Questions

  1. Have you ever given a loan to someone close to you? If so, how did it turn out?
  2. Have you ever received a loan from a friend or family member? If so, did you feel a greater sense of obligation toward them (as compared to a bank) or less?

Which Debt Should You Pay Off First? It’s NOT What You Think

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Nearly everyone on the web and in the financial press is telling us to get out of debt. Get out so you can save more, so you can retire early, so you can improve your credit score, so you can just get out of debt. But what if you have several debts—credit cards, a car loan, an installment loan (or two), a student loan and a mortgage. Which debt should you pay off first? Or does it even matter?

I think it does, in fact, I think it matters a whole lot. Some loans are just more…dangerous…than other loans, and need to be paid off sooner. This is especially true if you’re struggling financially. You should make a priority to pay off the loans that have the greatest potential to cause you the greatest problems in the event you can’t pay them any longer.

What Debt Pay First

Which Debt To Pay First?

Here’s my attempt at establishing that priority, and the reasons why for each. Feel free to disagree!

1. Car Loans

Most people start paying off debt with their credit cards, but I disagree. A car loan is a secured loan, which means that if you stop making the payments for any reason the car will be repossessed by the lender. If you hit on hard times and can’t pay your bills, the last thing you need to have happen is to have your car taken away.

You need your car to commute to your job, to run your business and to live your life. If it’s gone, you’re ability to pay your other debts will be gone with it.

Maybe this is just my thinking, but a car loan is really the most “strategic debt” that you have. A debt chain reaction will be set off if you lose your car, one that you may not be able to recover from any time soon. Get your car free and clear as soon as you can, then you’ll have time to deal with other debts.

2. Other Secured Loans

These loans could be debts taken to buy furniture, household appliances or to replace major components of your home, like a furnace or central air conditioner. And like a car loan, they’re secured and that’s why you want to pay them off ahead of unsecured debts. If you fail to make your payments for any reason, the lender will be able to take the collateral from you.

That may not be a problem if the collateral is furniture or a boat—you can live without those. But if it’s your computer that you use for business, or your air conditioner in the summer time, life will get ugly in a hurry.

These are worthy of being paid off right behind your car loan.

3. Student Loans

This is a sticky subject. Because they tend to be large and generally carry low interest rates, most people prefer to leave them alone and take every one of the ten, 15 or 20 years they have to pay them. But that’s not always the best course of action.

Though we may not think of it this way, it is a reality that student loans are unsecured debt. Even though they’re typically the size of car loans or even larger, there’s no asset beneath them that can be sold to pay them off if you get into financial trouble. Worse, they can’t be discharged in bankruptcy. In fact, except under certain very limited circumstances, you can’t settle them with the lenders in the way you might be able to with credit cards. For that reason, paying off your student loans deserves a higher priority than for credit cards.

4. Credit Cards

This is everyone’s favorite payoff! And why not? Credit cards are really annoying, at least when it comes time to pay them! But at the same time they’re aren’t as threatening as any of the above loans if you can’t pay them.

Sure, credit card lenders have remedies they can pursue against you, like nuking your credit, torturing you with collection calls, charging default interest rates and implementing judgments and garnishments. But they can’t take away your livelihood or kick you out of your home—that lowers them in the pay off hierarchy.

Usually, you can also settle your credit card accounts for less than what you owe, and there are even agencies—some of them non-profits—who will help you arrange this. In addition, though lenders can seek legal remedies against you, they often avoid going too far lest they push you into bankruptcy protection. Credit card lenders don’t do very well when that happens.

The popular “debt snowball” method really is the best if you have multiple credit cards. Pay off the smallest one first, then work your way up to the bigger ones. Each little one you pay frees up more money to pay off the bigger ones.

5. Mortgages

The reason for putting mortgages in last place? It’s typically your biggest debt and it will take many years to pay it off early. Also, even when you start paying it off, your mortgage won’t go away any time soon. Your house payment will remain fixed until the mortgage is completely paid off, as in zero balance. Since that will take many years to accomplish, the mortgage should be a low priority.

[Is it better to rent or own a home? <–What do you think?]

A couple of other things to consider in connection with a mortgage, one being that the payment is paying for something tangible—the use of your home. You’d have a rent payment if you didn’t own your home, so it’s not like the mortgage payment is something extra or extravagant. There’s also the tax benefit of having a mortgage. Since you get a break on your income taxes as a result of having your mortgage, paying it off should be less urgent than paying off debt that has no tax advantage.

Finally, if you plan on selling your home in the foreseeable future, there’s probably no point in working to pay down the mortgage. It will be paid off when you sell the house.

Is this debt pay off priority a bit unconventional? Probably. But when it comes to personal finance, I think it’s always worth looking at things from outside the box.

What to you think the priority should be when it comes to paying off debt?

photo credit: Freedigitalphotos.net

4 Ways To Prepare For Emergencies

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Most of us will face some type of financial emergency at some point in our lives. Because of this fact, it is not our ability to avoid such emergencies that leads to financial success, but it is often our ability to recover from them that matters. Even though we don’t know when, where, or how an emergency will come, there are some practical things that we can do in order to help us withstand them.

Having a financial contingency plan is always important, even more so, now that the economy is more unstable than ever, it is a necessity for every household! Trying to keep your finances organized when trouble strikes is part of the key to surviving and thriving in these situations.

Here are 4 things that you can do now in order to prepare for financial hardship:

Plan What Expenses To Cut

I think this is the first and easiest step in preparing for financial hardship. Before the disaster even comes, you can evaluate your expenses and determine which ones you could easily cut if necessary.

Think about it: Do you really need to have 500 cable channels? A data plan for you, your spouse, and all the kids? A car for every adult in the home? A two-week long vacation every summer; and another one for your anniversary?

I’m sure we can go on and on about what unnecessary expenses you can cut, and everyone’s list would be different; but the main point is that you have to think of these things before the emergency hits. Discuss this with all the members of your household now and see what current expenses you all could do without.

Thinking through these things in advance will be much easier, since financial hardships have a tendency to stir up strong emotions and make it hard to concentrate on the task at hand. Avoid the stress, the arguments, and the finger-pointing by making the tough decisions now, before the emergency strikes!

Financial Crisis

What Items Can You Sell?

While you’re talking to your family about what expenses you can cut out of your budget during a financial crisis, you should also make a list of the things you can sell. A good financial contingency plan will take into account how much money can be gained from selling certain items.

Again, it will be much easier to make this plan now, rather than when you are all under the stress of a financial hardship! Decide what items you can do without, and do some research to see how much you could possibly get for them. Knowing that you can get $7,000 for you 2nd car may be all that you need to survive a financial emergency.

Even if you don’t have a spare car, you can look for other items that you can sell during tough times. For instance, do you have a fancy lawnmower? Sell the fancy one, and buy a simple, used mower. This may not be ideal, but neither is being in the middle of a financial disaster with a fancy lawnmower, yet not enough money to make another mortgage payment!

If the emergency lasts long enough, or the financial disaster is large enough, consider selling your home and renting. Of course this only works if your house can sell for more than you owe (not the case for many who purchased within the last 5 years)!

Look at everything that you own, and decide what you can sell now. This is another tough decision that should be made before the emergency comes.

Establish An Emergency Fund

This is probably the most common way that we prepare for financial emergencies (it’s actually in the name ;-)). It is easy to set up an automatic transfer or direct deposit to your savings account, and let the fund build up to whatever your goal is.

Having money set aside will be extremely important if you were to lose your job, or face some other financial difficulty. In our case, once we are out of debt, we will aim to have between 9 months and a year of living expenses in a high-yield savings account. But for now, our goal is to be able to cover at least two months.

Many people have gone deep into debt (I’m one of them) because they did not have significant savings to carry them through a difficult time. The purpose of an emergency fund is to remove the stress, fear, and even the need to borrow, when financial hardship comes. Every good financial contingency plan should involve a large emergency fund!

Pay Off Debt

Next to having an emergency fund set up, this is probably the most important step you can take in preparing for a financial emergency.

It is much easier to adjust your living expenses than it is to rearrange your debt payments. So when you are in a position where you need to free up a large amount of committed money, you won’t have over $500 in student loan repayments (I’m telling on myself again) to worry about!

This doesn’t just go for long-term debt like student loans, mortgages, and car notes, but you need to fervently attack any short-term debt – such as pay day loans, personal loans, and even store/shop financing on things such as furniture or car repairs

Being at the mercy of credit card companies, banks, and other loan servicing agencies, will only add to your stress and may cause you to make bad decisions during an emergency.

photo credit: freedigitalphotos.net

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